Disappointing data signals drop in growth ahead for Japan

Japan's industrial production rebounded mostly driven by solid auto outputs, but not strongly enough to cancel out the declines in the previous two months. GDP is likely to post a contraction in the third quarter as a result

The number of foreign tourists to Japan has increased sharply over the past few months — While a contraction can be expected for third-quarter GDP, the current quarter should bounce back thanks to resilience in auto manufacturing and an influx of foreign tourists supporting service activity

0.2%

Industrial production

% MoM sa

Lower than expected

IP rebounds in September after two months of decline, but misses market expectations

Manufacturing output was surprisingly weak in Japan, with a mere 0.2% month-on-month sa rise in September after declines in the two previous months. Auto production led the rebound by improving global supply chains. We think strong auto sector performance will last for the time being, given the very tight global inventory conditions. But, with US sales expected to slow in the coming months, we may begin to see some cooldown of auto production from early next year. The survey of manufacturers showed that October production will likely rise 1.1%, and we think the recovery in manufacturing will strengthen entering the fourth quarter.

IP contracted in the 3Q23

Retails sales dropped -0.1% MoM sa in September (vs revised 0.2% in August, market consensus)

Retail sales unexpectedly posted a loss for the first time in two months. Household machines (4.1%) gained for the third straight month, but other major outcomes were pretty weak. Motor vehicles (-0.8%), apparel (-7.2%), and general merchandise (-0.8%) all fell. We believe that this month's dip is still temporary, as the labour market continues with the same trend. But, as price tags have risen more rapidly than wage increases for an extended time, the downside risk of slowing household consumption is growing.

Retail sales held up relatively well probably due to tight labour condition

2.6%

Unemployment rate, sa

The jobs-to-application ratio at 1.29

As expected

Labour market remained tight

Separately, jobs market data showed some improvement in September. The jobless rate edged down to 2.6% (vs 2.7% in August, market consensus 2.6%) and labour participation rate rose to 63.3% (vs 63.1% in August). In addition, the jobs to applications ratio was unchanged at 1.29 after trending down from the beginning of the year, and there are still more jobs unfilled in the market. We believe that a tight jobs market will likely support wage growth and consumption to some extent. The service sector will continue to lead the job markets on the back of solid tourism.

GDP outlook

As September IP and retail sales were softer than expected, we think that third-quarter GDP will be likely to post a small contraction. Manufacturing IP contracted -1.34% quarter-on-quarter sa in the third quarter (vs 1.4% in the second quarter), which should be the main drag for the growth. Retail sales improved in the same period with a 2.3% gain, but are estimated not to have caught up with high inflation.

We believe that a sharp correction in manufacturing will be the main reason for the contraction, and we have revised down our third-quarter GDP estimates from 0.0% QoQ sa to -0.2%. However, the current quarter growth should bounce back as resilience in auto manufacturing continues and an influx of foreign tourists supports service activity.